This is an entirely free service. No payments are to be made. Also send me The Ultimate Guide to Profiting From Derivatives and sign me up for Profit Hunter,a free newsletter that focuses on identifying short term money making opportunities.Download NowSubscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.

PFC: Healthy topline boosts profitability

Jun 4, 2013

Power Finance Corp. (PFC) declared its results for the fourth quarter of the financial year 2012-13 (4QFY13). The institution has reported a 46% YoY and 58% YoY growth in net interest income and net profits respectively. Here is our analysis of the results.

Performance Summary

Income from operations rises by 27% YoY during 4QFY13 and 33%YoY for full year FY13 on the back of a 23% YoY growth in advances.

Bottomline expands by whopping 58% YoY in 4QFY13 due to higher NII (net interest income), stupendous growth in other income, and lower provisions. However for the full year FY13, while the other income declined, the good show on core income performance boosted the profitability for PFC.

Net interest margins improve significantly to 4.4% in FY13 from 3.9% in FY12.

Net NPA to advances decreases to 0.63% at the end of FY13, compared to 0.93% in FY12.

Capital adequacy ratio (CAR) stands at healthy 18% as at the end of FY13.

Rs (m)

4QFY12

4QFY13

Change

FY12

FY13

Change

Income from operations

36,829

46,635

26.6%

130,149

172,603

32.6%

Interest expended

24,796

29,018

17.0%

88,035

111,605

26.8%

Net Interest Income

12,034

17,617

46.4%

42,114

60,998

44.8%

Net interest margin

3.9%

4.4%

Other Income

14

68

401.5%

223

123

-44.8%

Operating expense

393

412

4.7%

1,240

1,394

12.4%

Provisions and contingencies

16

15

-10.5%

54

57

5.2%

Profit before tax

11,638

17,260

48.3%

41,043

59,670

45.4%

Tax

3,455

4,318

25.0%

10,725

15,474

44.3%

Effective tax rate

29.7%

25.0%

26.1%

25.9%

Profit after tax/ (loss)

8,183

12,941

58.1%

30,317

44,196

45.8%

Net profit margin (%)

22.2%

27.8%

23.3%

25.6%

No. of shares (m)

1,320

Book value per share (Rs)*

169.3

P/BV (x)

1.1

* (Book value as on 31st March, 2013)

What has driven performance in FY13?

PFC reported healthy profits both for full year and for the last quarter of FY13 purely on account of good growth in interest income for the full year and other income for the quarter.

Despite the subdued credit environment, the advances for PFC grew 23% YoY for FY13 thanks to the IFC status that further provided impetus to the PFC lending and healthy sanctions pipeline. The sanctions for FY13 grew by healthy 26% YoY and the disbursements by13% YoY. The sanctions pipeline stands quite robust to the tune of Rs 1637 bn. 41% of these outstanding sanctions have their documents executed and the disbursements towards these have commenced. However, this traction in both disbursements and sanctions have been slightly lower compared to past trends as the company's asset mix tends to be exposed to the most vulnerable sectors of the economy. That said, with the constant measures pertaining to resolution of power sector related issues and the expected surge in disbursements and repayments, the power financer expects to maintain the accelerated growth trend in advances going ahead. In this regard, the company intends to raise around resources to the tune of Rs 404 bn (through bonds, FCL, medium term loans, and short-term loans) in order to bolster the loan growth in the current fiscal.

While the company's largest contribution comes from generation segment, incidentally both the proportion of sanctions and disbursements towards generation segment has come down to 51% and 57% in FY13 from 71% and 70% a year ago respectively. The company's exposure to state power utilities continues to remain highest with 77% of disbursements and 74% of total sanctions. While its distinctly clear that PFC's exposure to the beleaguered state power utilities stand higher, the company endeavors to diversify and de-risk its loan portfolio by increasing lending to private sector utilities that observed increased sanctioning during FY13. The transitional finance continued to show increased traction indicating company's commitment towards development of power sector.

Loans see growth on existing sanctions

(Rs m)

FY12

FY13

Change

Sanctions

594,290

751,470

26.4%

Disbursements

398,180

451,510

13.4%

D / S

67%

60%

Advances

1,300,720

1,603,670

23.3%

Sanctions Breakup

Generation

71%

51%

Transmission

5%

11%

Distribution

12%

2%

Others

13%

36%

Margins for PFC have remained in the comfort zone with FY13 witnessing traction in margins at 4.4% levels that improved from 3.9% a year ago primarily due to expansion in spreads by 62 bps supported by healthy interest income performance. However, quarterly show was not that impressive and the company observed fall in margins from 4.6% in 3QFY14 to 4.5% in 4QFY13. The management is confident of NIMs improvement in the light of expectation of policy rate cuts going forward.

Notably, PFC's asset quality has proved to be impeccable over the years vis-a-vis the industry levels and it continues to be so despite all odds. This can be attributed to the company's endeavors to focus on recoveries and repayments considering the fact that the company's loans are guarded by government guarantees and escrow mechanism. Furthermore, as mentioned earlier the company is constantly taking efforts to de-risk its asset portfolio as a matter of fact that PFC lends primarily to inherently weak state power utilities. Consequently, the gross NPAs have reduced to 0.7% as at the end of March 2013, from 1.04% a year ago. This was backed by the enhanced recovery rate at 99.4%. It is worth noting that PFC has observed no slippages to NPAs in the last 3 quarters of FY13. It has not restructured any SEB (State Electricity Board) debt as such. During FY13, with superior profitability in place, the company created 0.08% provisions for standard assets to the tune of Rs 1.3 bn in accordance with the RBI norms. While provisions for the quarter dropped, the full year provisions were up by 5% YoY for FY13. As the company continues to combat certain stressed accounts and has succeeded in lessening the bad loans, the one such exemplar is that of a long-standing NPA account namely Konaseema Gas which is expected to turn into a standard asset anytime soon with the positive developments pertaining to the gas project and the expected payments.

The company declared a healthy 70% dividend for FY13 comprising of 60% interim dividend.

What we expect?

At the current price of Rs 183, the stock is trading at a multiple of 0.8 times its FY15 adjusted book value. It is a known fact now that power sector has been grappling with certain chronic issues pertaining to fuel linkages, environmental clearances, financial closure, policy inaction which in turn have raised concerns for the lenders. That said, the sector is witnessing daylight in recent periods with the accelerated reforms in place, increased momentum in fuel supply agreements, expectation of further tariff hikes by state power distribution companies and the recent financial restructuring plan (FRP) for state discoms and disputes resolution with respect to Fuel Supply Agreement (FSA) allaying concerns of power financiers.

For PFC in particular the going has been levelheaded though not that suave. While banks have always remained at an arm's length with respect to lending to beleaguered power utilities, PFC along with REC has emerged as a largest lender to the power sector. Being the nodal agency for ultra-mega power projects, the Restructured Accelerated Power Development and Reform Programme, and the Independent Transmission Projects Scheme, PFC continues to be not only a dedicated financier to the power sector but an integrated institution with GOI towards development of power sector.

Nevertheless, the institution has far superior asset quality versus most banks in the public or private space. Over the past 25 years it did not account for any bad debts written off in the state sector. Moreover, the management is hopeful of maintaining the asset quality on account of government guarantees, and the escrow mechanism. More importantly, it does not restructure terms and conditions of its advances as it lends on a project specific basis. It has not restructured any SEB (State Electricity Board) debt as such. Moreover, the provisioning has been beefed up in the last quarter of FY13.

The company matches re-priceable assets and re-priceable liabilities every year which holds the balance sheet is good stead. In addition to the same, the company enjoys robust resource profile with competitive rates. Sufficient capital, robust sanctions pipeline, IFC status and with GOI as the major shareholder and supporter makes us positive on the company. However, the power sector concerns and the company's exposure to the risky assets prompts us to reiterate our Hold rating on the stock. We will update subscribers with our revised estimates and FY16 target price for the stock by July 2013.

OTHER USEFUL LINKS

MARKET STATS

ABOUT EQUITYMASTER

Since 1996, Equitymaster has been the source for honest and credible opinions on investing in India. With solid research and in-depth analysis Equitymaster is dedicated towards making its readers- smarter, more confident and richer every day. Here's why hundreds of thousands of readers spread across more than 70 countries Trust Equitymaster.

All rights reserved. Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.